A Toronto company that is delivering textbook content to millions of higher-education students through their smartphones has raised US$55-million in debt and equity to speed up its expansion strategy.
Tophatmonocle Corp. (Top Hat) said it has secured US$20-million in equity financing co-led by its existing investors, Canadian venture-capital firms Georgian Partners Inc. and Inovia Capital Inc., plus an additional US$35-million in debt financing from Bank of Montreal’s technology and innovation banking group.
Top Hat chief executive Mike Silagadze wouldn’t disclose the valuation the financing placed on the company, but said it represented “a good increase” over the US$185-million represented by the company’s last venture-capital financing three years ago, which was led by New York’s Union Square Venture.
While giants of the US$35-billion academic publishing industry such as Pearson PLC have struggled, Top Hat has been increasing revenues by more than 50 per cent annually and expects to top US$50-million in its fiscal year starting April 1. The 11-year-old company offers a digital platform that enables professors to offer interactive electronic textbooks, tests, assignments and feedback to students digitally to their smartphones. Students across North America have taken 2.7 million courses since April and professors have published 600 of their own textbooks to date using Top Hat.
Now, the 400-person company is aiming to fuel additional sales growth by partnering with many of the roughly 1,200 higher-education print publishers in North America to get them to shift their print courseware to its digital platform in revenue-sharing agreements, starting with Fountainhead Press LLC and Bluedoor Publishing LLC. “It’s not something that can be done by these mid-sized and small publishers on their own,” Georgian partner Justin LaFayette said. “This is a business model where they can help all these publishers jump to the digital world in a very efficient, seamless way."
The idea, Mr. Silagadze said, is to capture a significant chunk of potential textbook customers who currently forgo buying expensive new textbooks and instead purchase used or illegally photocopied versions, while making books available to students who are increasingly using their smartphones to access content. Top Hat plans to charge a fraction of print prices for the same content online, banking on the lower cost of digital distribution combined with an expected increase in demand to drive improved results.
“The entire academic textbook publishing space has been facing double-digit revenue declines,” Mr. Silagadze said. “Top Hat is offering this cure [to traditional publishers] and turning it into a [cloud software] business." He said Top Hat plans to use the financing proceeds to invest in product development and sales and marketing as well as mergers and acquisitions
Early investor Boris Wertz of Version One Ventures LLC said Top Hat has succeeded where other education technology startups have struggled, by not targeting sales to slow-moving and cash-strapped universities or their dated information technology departments, or challenging incumbent technology players such as BlackBoard Inc., but by selling directly to professors.
The financing comes in advance of the company’s plans to either take on a significant private-equity investor next year or go public, although it will likely pursue the private-capital route.
Mr. Silagadze said Top Hat turned to debt for most of the current financing because the company can afford to service it, which he says comes at a far lower cost of capital than selling more of the company to equity investors at a time of persistently low interest rates.
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